Theme 3 ( Need To Learn ) Flashcards
Principal-agent problem
Owners aim to maximise profits, workers aim to maximise personal benefit - workers acting on behalf of owners without their best interests
Advantages of vertical integration
Less risks, control of quality of supply, increased profit potential
Disadvantages of vertical integration
Lack of expertise in industry
Advantages of horizontal integration
Reduce competition, specialisation, expertise in area
Disadvantages of horizontal integration
Increased risk as investment all in one area
Conglomerate
Merger with a firm you have nothing in common with
Reasons for demergers
Diseconomies of scale, some areas costing outer areas, authorities over regulation
Impacts of demergers
Workers - promotion or loss of job, Business - Increase innovation or smaller EoS, Consumers - better products or greater price
Reasons for revenue maximisation
Managers/workers salary usually based off revenue, fall in revenue lead to a fall in staff, also greater quantity so EoS and lower price so discourages competition
Reasons for sales maximisation
Increased security of business, increase market share + can build customer loyalty, short-term strategy, represents limit pricing
Statisficing definition
Principal- agent problem, workers don’t profit-maximise but keep enough profits to keep owners happy
Internal EoS
Technical (production - machinery/specialisation), Financial (greater security+ investment more accessible), Risk bearing (able to take greater risks), Managerial (specialised managers), Marketing/Purchasing (bulk supply)
External EoS
Improved infrastructure, increased labour in area
Diseconomies of scale
Less motivation, geography, harder to control do-ordinate, harder to respond to change
Collusive behaviour
Collective agreement to reduce competition, reduces uncertainty of firms - works best in an oligopoly due to high barriers and high trust due to little firms
Overt collusion
Firms come to a formal agreement (illegal) - cartel behaviour
Cartel behaviour
Rules laid out in a formal document - either agree on price and compete on non-price competition or agree to divide market share
Issues with cartel behaviour
Incentive to break cartel as price/output not level firms would choose
Tacit collusion
Non-formal agreement (not illegal )
Examples of Tacit Collusion
Price leadership (large firms decide price, small firms follow to avoid price wars), Barometric Price leadership (firms gain reputation for being good at leading market )
Game Theory - Maximin policy
Firms work out strategy where worst possible outcome is the best - often used in oligopolies
Game Theory - Maximax policy
Firms working out policy with the best possible outcome
Issues with Game Theory
Always incentive to break game theory
Price wars
Occurs in markets where non-price competition is weak, firms make a loss in the short-run but some forced to leave in the long-run - loss of profits